Jeremy Grantham is the co-founder and chief investment strategist of GMO LLC, a Boston-based asset management firm that held roughly $118 billion in assets as of March 2015.
Jeremy Grantham is the co-founder and chief investment strategist of GMO LLC, a Boston-based asset management firm that held roughly $118 billion in assets as of March 2015. ◦ In August 2019, he dedicated approximately $1 billion, about 98% of his personal wealth, to fighting climate change. ◦
Grantham's approach is summarized by 'reversion to the mean': the belief that asset classes and markets will revert to historical levels from peaks and troughs. ◦ He has stated, "Early in my career, I came to the conclusion that everything important in the markets is mean-reverting." ◦ He also wrote, "I have often said that they [bubbles] are the only really important events in investing." ◦ He views green technologies as profitable long-term investments. ◦ He has argued, "The marginal cost of wind and solar and almost all green energy is nil," which he argues makes it hard for even falling fossil-fuel prices to compete. ◦ On resource limits and finite growth, he said, "We're the bacteria in the petri dish... We're down to our last double. We can see the outer rim." ◦
His firm examines historical changes to predict results seven years forward, taking positions when deviations occur from historical averages. ◦ Grantham avoided Japanese equities during the late-1980s asset bubble, limited technology exposure during the 1990s Internet bubble, and restricted housing-bubble exposure in the 2000s. ◦ He holds that roughly 95% of price moves were unknowable and unpredictable; the other 5% were manageable or predictable and represented the real investment opportunities. ◦ He has noted, "It is easier and safer for one's career to be wrong and be part of the crowd than to be a contrarian." ◦ He also warned, "Eventually, valuations hit fair value or replacement cost. You may, though, have different clients by then. Or no clients at all." ◦ On bubble reversions, he wrote of studying 34 completed bubbles: "Every single one of them has broken all the way back to the trend that existed prior to the bubble forming." ◦
Mean reversion is central to his framework, as is the view that bubbles are the only really important market events. ◦ ◦ He defines a bubble as occurring "typically when economic conditions are nearly perfect and there's plenty of money around." ◦ He uses a two-sigma statistical threshold to identify bubbles. ◦ He also defines a true bubble by feel as "excellent fundamentals irrationally extrapolated," noting that euphoric phases of epic bull markets "tended to rise at an accelerating rate in the final two to three years and to fall even faster." ◦ On competitive advantage, he believes, "There is no better way to make money than to have a near monopoly or a complete monopoly, to be a price setter." ◦ He notes that "it is easier and safer for one's career to be wrong and be part of the crowd than to be a contrarian." ◦ His 95/5 rule holds that roughly 95% of price moves are unpredictable, while the remaining 5% represent real investment opportunities. ◦
Grantham's expertise spans asset management and investment strategy. ◦ He has deep experience in bubble identification and market history, having studied 34 completed bubbles. ◦ He is actively engaged in climate change and green technology investment, having dedicated the majority of his personal wealth to fighting climate change. ◦ He discusses resource limits and finite growth. ◦ He has also commented on US venture capital, calling it "the last, best American exceptionalism." ◦
Grantham uses statistical framing when discussing markets, noting, "A two-sigma event in statistics is the kind of thing that happens every 44 years." ◦ He employs vivid metaphors, including the description of humanity as bacteria in a petri dish. ◦ He writes quarterly letters with evocative titles such as "Let the Wild Rumpus Begin" and "Not With A Bang But A Whimper." ◦ ◦ He makes declarative market declarations, stating, for example, "Today in the U.S. we are in the fourth superbubble of the last hundred years," with simultaneous bubbles across equities, housing, bonds, and commodities. ◦ He also acknowledges his own biases, noting that for bubble historians, "it is tempting to see them too often." ◦
Grantham avoided Japanese equities during the late-1980s asset bubble, limited technology exposure during the 1990s Internet bubble, and restricted housing-bubble exposure in the 2000s, while acknowledging that "it is easier and safer for one's career to be wrong and be part of the crowd than to be a contrarian." ◦ ◦ He recognizes the cost of being early to a bubble call: "Eventually, valuations hit fair value or replacement cost. You may, though, have different clients by then. Or no clients at all." ◦ He admits the temptation to over-call bubbles after a bubble-rich era, stating, "For bubble historians eager to see pins used on bubbles and spoiled by the prevalence of bubbles in the last 30 years, it is tempting to see them too often." ◦ He fears a slow grind more than a crash, writing, "It is far more likely that the mean reversion will be slow and incomplete. The consequences are dismal for investors: we are likely to limp into the setting sun with very low returns." ◦ He simultaneously expresses a belief in US venture capital as "the last, best American exceptionalism" while describing humanity as bacteria hitting the limits of a petri dish. ◦
Frame discussions around historical data and seven-year forward predictions based on deviations from historical averages. ◦ Recognize that he considers 95% of price moves unpredictable and focuses on the remaining 5% as real investment opportunities. ◦ Understand that he views contrarianism as carrying career risk, and that being early on bubble calls can result in having "different clients by then. Or no clients at all." ◦ Note that he commits personal capital to climate change, viewing green technologies as profitable long-term investments. ◦ Expect statistical framing, such as references to two-sigma events, when discussing market extremes. ◦